A MGM insider just placed a $20 million bet that MGM shares are heading higher. This despite investor worries that the casino operator could be in the crosshairs as China retaliates against U.S. tariffs.

On May 10, Paul J. Salem filed a Form 4 disclosing the purchase of 800,000 shares of MGM Resorts Int’l (MGM) The shares were bought on May 8 at $25.40. The $20.32 million open-market buy was Salem’s first at MGM since joining the casino operator in August of 2018.

Salem is a senior managing director emeritus at Providence Equity Partners, a private equity firm with $60 billion in assets under management. The Form 4 indicated that it was Salem’s personal funds used for the purchase.

The eye-catching MGM insider buy comes as the shares of U.S. casino companies with operations in China-controlled Macau come under pressure with the re-escalation of the U.S.-China trade war.

10 U.S. Companies with high revenue exposure to China Tariffs

General Motors Co. (GM)

Ford Motor Co. (F)

Nike Inc. (NKW)

Tiffany & Co. (TIF)

MGM Resorts International (MGM)

Wynn Resorts Limited (WYNN)

Boeing Co. (BA)

FedEx Corp. (FDX)

Intel Corp. (INTC)

3M (MMM)

Source: Morgan Stanley

Like Hong Kong, Macau is a “special administration district” — part of China, but with it’s own currency and legal system. It operates without interference from Beijing (officially, at least.) Macau, a tiny island located off the southeast coast of China, is one of the largest gambling destinations in the world. The $37 billion gambled annually there is over 5 times that of the Las Vegas Strip.

Three of the six major Macau casino operators are either wholly or partly-owned by American interests, including Sands China, Wynn Macau and MGM China. Las Vegas Sands is owned by major Republican Party donor, Sheldon Adelson. MGM China, a joint venture by MGM Resorts Int’l and billionaire Macau businesswoman Pansy Ho Chiu-king, is 56% owned by MGM.

Will China-controlled Macau play hard-ball and not renew U.S. casino licenses in the gambling mecca?

For Q1 2019, MGM China reported net revenues of $734 million, a 23% increase compared to the prior year quarter. This compares to total MGM Q1 2019 revenue of $3.18 billion.

There are fears that if China wants to play hard-ball it could tell Macau not to renew the casino licenses of U.S. companies. However, on March 14 Macau announced it extended casino licenses for MGM China until 2022, aligning MGM’s renewal date with other operators. So it appears that any change to MGM’s casino licenses in Macau is not imminent.

MGM Resorts Int’l 5 year weekly chart. Source: Interactive Brokers

While a $20 million insider purchase may not be monumental for a very wealthy person like Paul Salem, the trade does stand out as large in dollar terms. The street is worried that MGM will be hurt by the trade war. MGM stock has lost nearly $2 billion since the recent trade brouhaha began. So why might the MGM insider be so bullish? What’s the contrarian story that Paul Salem might be betting on?

Which of the following contrarian stories might MGM insider Paul Salem be betting on with his $20 mil buy?

The trade war will in fact have minimal or no effect on MGM business

MGM’s domestic business in the U.S. looks very good

The stock trades at a cheap valuation

all the above.

I have no insight into the odds of Beijing withholding Macau casino licenses as retribution for U.S. trade actions. But potentially MGM insider Salem does. Maybe he thinks renewal of MGM’s Macau licenses is likely.

Non-China business could be on the upswing. After MGMs Q1 report, Nomura Instinet analyst Harry Curtis said MGM Resorts will see a second half bounce out of Las Vegas. He has a buy rating on MGM and price target of $36. Morgan Stanley sees near-term catalysts for MGM coming out of the company’s real estate portfolio. The firm also notes the bullish implications of news that MGM Resorts Int’l will team up with Japanese financial services group Orix to bid for one of Japan’s first three casino licenses. That market that could be worth up to $15.9 billion a year.

On April 28, before the most recent trade spat, portfolio manager Mark Giambrone told Bloomberg that MGM was “very inexpensive, with lots of good opportunities.” He said that the company has $3.50 per share of cash flow looking out to 2020. At it’s current price, that’s a price-to-cash-flow of about 7.25.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this blog is meant for educational and informational purposes only. Do your own research before investing and don’t risk more than you can afford to lose. This article expresses my own opinions, and I am not receiving compensation for it (other than from WhaleWisdom). I do not have a business relationship with any company whose stock is mentioned in this article. I or my associates may hold positions in the stocks discussed.﻿

Mark Gaffney is an investor and money manager with over two decades experience analyzing and profiting from the SEC filings of "Whales" -- elite managers and corporate insiders with superior information.
mark@gaffneycapital.com